Planning for a child’s higher education can become challenging as education costs continue to rise. A course that costs a few lakh rupees today could require a much larger amount after 10 or 15 years. For parents, starting financial planning early can help reduce the pressure of arranging a large amount at the last moment.
One way to build a dedicated education corpus is through a Systematic Investment Plan (SIP) in an index fund. Instead of waiting until the child is ready for college, parents can begin with a relatively small monthly investment and continue it over the long term.
What Is an Index Fund?
An index fund is a mutual fund designed to track a particular market index. Its portfolio generally consists of the stocks included in that index and follows their respective weightages.
Unlike actively managed funds, where a fund manager selects securities based on the fund’s strategy, an index fund primarily aims to replicate the performance of the underlying index.
For parents with 10 to 15 years before their child requires funds for higher education, the longer investment period can provide an opportunity to invest through equity-oriented products. However, equity investments are exposed to market fluctuations, and mutual fund returns are not guaranteed.
How to Start an Education SIP With ₹1,000 or ₹2,000
An SIP allows investors to put a fixed amount into a mutual fund at regular intervals, usually every month. Parents can start with ₹1,000 per month and increase the contribution to ₹2,000 or more if their finances permit.
According to AMFI, an SIP can be started with an amount as low as ₹500 per month. For example, investing ₹2,000 every month for 15 years would result in total contributions of ₹3.60 lakh.
The final value of the investment, however, will depend on market performance. Therefore, the ₹3.60 lakh represents the amount invested over the period and should not be confused with a guaranteed maturity value or return.
What Parents Should Consider Before Investing
An SIP should be planned according to the time remaining before the money will actually be required. Parents can consider increasing their monthly contribution periodically as their income grows or as their financial situation allows.
Risk management also becomes increasingly important as the education goal gets closer. Since equity investments can fluctuate, keeping the entire education corpus exposed to equity for a long period close to the withdrawal date may not suit every investor.
Parents should therefore review their investment strategy as the education deadline approaches and consider the level of risk they can afford to take. Starting early, investing regularly and reviewing the plan periodically can help keep the financial goal on track.
Disclaimer: This article is for general informational purposes and should not be considered investment advice. Mutual fund investments are subject to market risks, and returns are not guaranteed. The example involving a ₹2,000 monthly SIP only illustrates the total amount invested and does not represent a guaranteed future value. Investors should consider their financial goals, risk tolerance and investment horizon and consult a qualified financial adviser before making investment decisions.